Tuesday, September 09, 2014

Venezuela Default Headline

Bloomberg's headline "Venezuelan Default Suggested by Harvard Economist" is extraordinarily misleading. A much more accurate version would be "Maduro Foe Makes Fun of the Government." It's Ricardo Hausmann, who was Minister of Planning when Hugo Chávez tried to overthrow his government, and he ends the interview by saying that he would resign if he were Maduro. The headline suggests some objective professor with Harvard gravitas.

At least the article itself lays out a bit more than that--Hausmann's argument is that the government should default and use the funds to alleviate shortages, saying that to do otherwise is "moral bankruptcy." Another economist, Francisco Rodríguez argues that default doesn't get at the real problem:

“Venezuela has more than enough foreign currency earnings to both ensure an adequate supply of imports and meet its foreign obligations,” Rodriguez said in a Sept. 5 note to clients. “Current scarcity levels are caused not by the need to service on the country’s external debt but by the massive distortions to relative prices that have resulted from the country’s tight price and exchange controls. Resolving these relative price distortions, rather than defaulting, is the key to restoring Venezuela’s macroeconomic health.”

Debt might be a problem, then, but paying it off is not the source of consumer good scarcity. What you need is to tackle the economic incentives that encourage smuggling, hoarding, and producing (or, as the case might be, not producing).


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